BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “CONTRARIANISM”

Posted on October 15, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

Many investors are following the trend for making their investment decision but for becoming a superior investor, we need to think in an oppositely.

As we have seen that for becoming superior investors, we need to develop a skill of second level thinking. Second level thinking provides us an opportunities to generate above-normal returns and also protect us from the loss of capital. We need to think against the crowd because crowd generally operates at the basic level of thinking rather than the second level of thinking.

If we engaged in doing what others are doing then we also get what others are getting. So for getting superior from others, we need to think differently.

When we are joining the herd then following the herd can be dangerous to our financial health. When people are highly optimistic then prices started moving upward, top-level starts to form. And when people are panicky selling then prices started to go down, bottom starts get the form.

It seems much easier while we are understanding the concept but it is a much difficult task while we put it into the action.

1) We never come to know that how far pendulum will swing, when it will be reversed and how far it will swing to the opposite direction.

When pendulum starts moving towards an extreme then we are not able to know the extract extreme point and from where it will start reversing. Overpriced stock can become more overpriced and cheaper can become cheaper.

2) We can be only sure about the reaching of the pendulum to the extreme level. We can just make an estimation that pendulum will reach an extreme, reversed it to mid-point and move towards opposite direction where it will reach to another extreme point.

3) There are many points which can influence the market behavior, many reasons which make pendulum to swing and not anyone strategy which is always able to generate a higher returns.

There are many examples where we can able to see the overpriced situations but we cannot be sure that such situations will reverse from tomorrow and starts going down. It can remain more overpriced and can keep on staying to the same situations for over a period of time.

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We can able to see that expensive stock remains expensive for the longer period of time and cheaper get cheaper over a period of time.

Also, we cannot always go and make a decision to do the opposite of what everyone is doing. We cannot start walking backside as everyone is walking towards the front side. Just doing opposite of what everyone is doing, does not provide us profit-making opportunities. We need to analyse and make a logical reasoning then reach to the conclusion that we should go opposite or not.

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If we just do opposite of what others are doing without doing proper homework then also we can able to lose our financial wealth. So that it is not only to take contrarian decision is enough but with it, proper homework is also required.

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If some assets are temporary getting hate by people & with our proper homework then making a contrarian decision on it help us to generate an above-normal returns.

If everyone like some idea than probably it has done well or doing well. And if everyone is liking some ideas then prices reflect those liking. So much risk involves when crowd changes their mind. Price can fall significantly due to change in the mind of the crowd; which is harmful to our financial health.

We can able to create above average returns when we can able to buy an investment at the substantial discount. And the discount is available only when the major crowd is not liking it, not at where everyone is liking it.

For the protecting our financial health, we require having a skeptical mindset. When we skeptically analyze any situations then we will not fall in trap with the crowd. We have to always keep in mind that what can happen and what is the probability of occurrence of those events.

When a crisis happens than actually, we can able to see & believe in the negative side of the market. But we have to skeptically think regarding the negative side when positive waves going on. We always need to think that what can go wrong while everything is going in a good way.

If we believe in the story prevails among the market then we will definitely do what others are doing. We will tend to buy an investment at a high price with expectations of generating higher returns. We keep on buying overpriced securities with an expectation of another great fool will buy it from us. But we always need to keep in mind that while we are buying overpriced assets then we are only the great fool, no one else.

We will buy things which doing well and sell which performing poorly. Such actions resulted towards the losses during the crisis time, also we might not able to take benefits when things recover from the bottom. We remain followers not able to become contrarian.

We need to be skeptical enough for identifying the aspects that which is good for creating wealth and what is not good for it.

If we keep on follow the herd then we will not get a chance to evaluate situation skeptically and we will lose while the optimistic situation turnout as a pessimistic situation.

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “Combating Negative Influences”

Posted on September 10, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

In this article, I am going to discuss regarding the psychological factors which affect our decisions negatively.

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Market many times provide us an opportunities to earn superior performance through inefficiencies, mispricing, misperception, mistakes of other people.

But the question is why such opportunities come? What makes us different from other people? Why mistakes do occurs?

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We need to analyze data and reach the conclusion. In investing errors occurs not due to analytical factors but errors mainly come from psychological factors.

Let’s look at the few psychological elements which affecting the investment decisions.

First emotion is GREED – Desire for money.

Most of us are making an investment for making more money. If we don’t care about the making more money than we are not going to make an investment.
And also there is nothing wrong with trying to make money. The market and economy run because of our desire to make money. But we should remain careful with a transformation of desire towards greed.

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Real estate

Real estate sector in India in the year 2007-08 creates a bubble and huge jump in the optimism by everyone. Such situation resulted under the sharp fall in the value of the sector.

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Due to an impact of greed, people hope that their strategies help them to produce higher returns without taking higher risk for forever. And due to this hope, many times people hold highly priced securities with expectations of more appreciation can be possible. Many times such expectations went wrong and prove that expectations were unrealistic and people have ignored the risk.

Opposite of Greed is FEAR. As similar to the greed, excess fear is also harmful to the investors. Excess of fear stops us from taking a constructive decision while actually, we require taking such decisions. Due to fear, many a time we cannot able to make a good investment and also lose the opportunity.

The third factor is PEOPLE’S TENDENCY TO DISMISS LOGIC.
Generally, it happens that people stop using logical thinking and they start doing work with an irrational mindset. Many a time, we are not ready to accept logical reasoning for the situations and work as per unrealistic scenario. We do not apply what we have learned in the past but get easily deviate from those learning.

When market or a particular strategy starts generating higher returns for a while, then we started believing that it will continuously generate such returns without an involvement of risk.

Howard Marks called such situations as “Silver bullet”, the Holy Grail.

But is it really same strategy keeps on generating higher returns without risk?

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As Warren Buffett mentioned, when prices started rising then it affects to the reasoning power of the people. It led to mania and situations of mania results towards the bubble.

The fourth factor is THE TENDENCY TO CONFORM TO THE VIEW OF THE HERD RATHER THAN RESIST.

Many a time, we started Believing to the crowd and starts to take an action as per the crowd behavior. Though behavior of the crowd is harmful and dangerous to us.

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The fifth factor is ENVY. Envy comes into the picture when we are comparing ourselves with others. And envy works as a negative force which affects our decisions.

When we see that our investment is growing then we remain happy. But the time we start comparing our investment returns with investment returns of others then we become sad. Now, envy starts showing its color and we make decisions which we may not take or which may be harmful to the financial health.

It is very difficult to see the higher growth of other compared to our growth.

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The sixth factor is EGO. Ego gets satisfaction while we generated higher returns compared to others. And we are keeps on evaluating our return in the short term. While we should focus on the longer horizon returns rather than keeps on tracking returns in the short term and also try to get out of the trap of ego. Ego can be harmful to the financial health. We keep on demonstrates that how much we know much compared to others rather than focusing on how much we know and how much we do not know.

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The seventh factor is the CAPITULATION. It means investors give up towards the situations while economic and psychological pressure becomes irresistible.

Many a time, overpriced assets become more overpriced, and underpriced assets become more and cheaper. This scenario affects to the psychology of investors and repetitions of such situations inspired investors to give up towards the situations and make investment decisions without using logical reasoning.

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When few or all the factors combined then it affects to the investor’s decision making and that affects the market. This resulted in the mistakes and those can be expensive for our financial health.

Psychology in IPO is funny. When our friend is applying to IPO and we asked for the business then he doesn’t know about the business. But he is applying for getting good returns. And he continuously getting higher returns and such higher returns earned by our friend attracts us to make an investment into the IPO. And such situations keep on repeating & more people get involved into the IPOs.

IPOs

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Read for more detail: The Most Important Thing Illuminated by Howard Marks

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “AWARENESS OF THE PENDULUM”

Posted on August 28, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

In the previous article, we have seen that everything moves in a cycle. And if we cannot able to understand the cycle, then we must pay for it. In this article, I am going to discuss on moments of the pendulum and how we can take benefits of its moments.

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We have seen pendulum and its moments. Generally, pendulums do not always remain to the extremes, majority time pendulum stays near to its main point. And whenever pendulum moves towards its extreme then again it will come back towards either extreme. The force of the swing of the pendulum itself responsible for its reversal.

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Generally, our behavior towards the situation is responsible for the swing of the pendulum towards extremes and also responsible for coming back towards its mean point. Investors see the situation with either greed or fear and reach to the conclusion. When people are greedy, they become more optimistic toward the situation and they want to pay any premium for getting that situation favorable. Vice-versa, when people feel fear, then they are not ready to buy the stock at the cheapest value.

Excess greed creates risk taking behavior and excess fear creates a risk aversion among the people.

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As there are two major risks in investing – 1) Risk of losing our capital and, 2) Risk of losing opportunities. But when pendulum moves towards the extreme end, then one of the above risks will dominate our investment decisions.

When pendulum at extreme bullish situation then

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And when the pendulum nears to the extreme bearish situation then

When things happen in a good manner, then people become more greedy and confident about the situations which bring optimism towards the particular situations. People forget the involvement of risk and ready to pay anything for getting the assets. Vice-versa when things not happening in a good manner, then people are more fearful towards the situations and realize the inherent risk. Such situations bring bargains for the assets.

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Sugar prices

Sugar stocks

We can able to see that when prices of sugar were low, people not ready to make an investment in the sector, etc. at such situations provide us a bargain opportunities and when things start getting well, we can able to make a good return. Vice-versa when everyone knows about the story, then that story is there in the price. We cannot able to make an abnormal return or chances are high to lose of our capital.

Wise people recognize the bargain first, then others will follow them and run behind the assets for buying it at any premium price.

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We have seen three phases of the bull market. As similar to it, the bear market also has three phases.

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When everyone fears with the negative news, events and they start thinking that such worst situations remain forever. Major bottom occurs over such situations. When everyone forgets that tide can again come in and such situations provide us a bargain opportunity. Vice-versa when everyone thinks that good time never going to end and they can generate higher returns easily, people forget that tide can go out then major top gets formed.

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Those people who understand swing of the pendulum then they have protected their capital as well as made the huge return during the year 2009 and year 2014.

When everyone fears from the situations and think such worst remain forever. When such situations arise then the person who analyses and conclude that things can go better he can generate a better return with lower risk. Vice-versa when everyone thinks that things remain better forever than that is a period of painful losses.

The pendulum never continues to swing towards an extreme, it will be reversed from extreme. Extreme swing of the pendulum is itself responsible for the swing towards the opposite direction of the pendulum.

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Read for more detail: The Most Important Thing Illuminated by Howard Marks

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “BEING ATTENTIVE TO CYCLES”

Posted on August 20, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

In this article, I am going to discuss on cycles and reasons for the occurrence of the cycle. For becoming a successful investor, we need to understand cyclicity of the market, earnings, business, etc., then only we can able to protect ourselves from the destruction of our wealth as well as we can able to grow our wealth.

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We as a human also born, grow up and die. These cycles keep on continue. And like that company also came into existence, grow up and once it will close or might get some revolution.

(Click here for human life cycle – https://www.youtube.com/watch?v=SdprpVCIhu0)

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As like our life, Economy, businesses, products, earnings of businesses, etc. also rise and fall. It also moves in a cycle. Many a time people forget that everything moves in a cycle and that situation provides us an opportunity for protecting and creating a wealth. We should always keep in mind that nothing in the world keeps on rising in a straightway. It will rise to an extreme level and falls to an extreme level.

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The margin of the company increases when the price of the iron ore increases and margin fall with the fall in the price of the iron ore. We must have to understand the cycle for protecting our wealth.

The main reason for the cyclical behavior of the economy is human involvement. Human nature is not mechanical but humans are emotional and inconsistent. Many a time Humans take the decision based on their feelings, emotions which itself cyclical in nature.

When we feel good, we remain optimistic about the situations and reverse when we feel bad then remain pessimistic about the situations. Our psychological involvement pushes cycle to the extreme points and after that extreme point, cycle corrects itself to the reverse direction and then again come to the mean value.

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If we see carefully, then we can able to understand that more worst loan given at a good time rather at the bad time. Because people forget the cyclical nature of the economy, industries, businesses, etc. also the credit available at cheaper rate. And additionally, people break discipline. They start to borrow extensively which will be resulted into the burst of the credit cycle.

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Credit cycle –

When we are happy then we might get happier for some period and then our mood turns to the sad and vice-versa. Our mood also keeps on fluctuating and that turns out to be our happiness or sadness. Sometimes we become extremely happy or sad, but that situation does not remain similar for forever. It will change, it will get normalized.

So, if the cycle is in a good phase, then it might be remaining more good for the period and then correct for the bad phase and vice-versa. It will not remain good or bad for forever. It will come to the mean value at some point in time.

The cycle only stops occurring while people take all decisions by being unemotional and rational. But it is not always happening and such human decisions which will be resulted in the cyclical behavior of the market /economy. And this is only the major reason for keeps on occurring cycles.

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High profit into the business attracts the competition. This competition will turn high-profit margin into the low-profit margin. And business will fall into the problem. Many players get close and get out of the business. Consolidation of among the players will happen and few players survived in the business. Those survived players will again be getting a good amount of business and the again cycle starts moving. No business keeps on growing for forever with the same pace of growth.

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